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A Bombing Pause In The War Against Inflation?

March 10, 1996

Washington Outlook

A BOMBING PAUSE IN THE WAR AGAINST INFLATION?

When Alan Greenspan emerged from the Oval Office on Feb. 22, the normally poker-faced Federal Reserve chairman was grinning ear to ear. And why not? President Clinton had just nominated him to a new term and filled two other Fed vacancies with low-key moderates who had Greenspan's blessing. So the Fed chief will have carte blanche over the next four years to pursue his long-cherished goal of zero inflation. Right?

Hold on. Beneath Greenspan's ideological armor beats the heart of a cautious pragmatist. The Fed chief has checked the national pulse and concluded that '96 is no time to push the consumer price index below last year's 2.5%. If anything, Greenspan will emphasize ensuring annual economic growth of about 2% for as long as possible. That means more interest-rate cuts may come--perhaps as soon as Mar. 26, when the rate-setting Federal Open Market Committee meets next.

NO SCAPEGOAT. Some hawks on the FOMC still want to wring as much as another percentage point out of the inflation rate in coming years. But privately, Greenspan signals that the political cost of such a move would far outweigh the unproven economic benefit. Already, the moderate growth Greenspan is pursuing to keep inflation in check is under attack from both parties, which are pushing for faster growth to allay worker job insecurity. The Fed boss knows that if he sacrifices growth to squeeze more inflation out of the economy, he'll goad President Clinton and Pat Buchanan into making him a scapegoat.

In an ideal world, Greenspan believes, real price stability would be best. But he recognizes there is no conclusive Fed research supporting that belief, which is why some central bank insiders predict Greenspan will be cautious about driving inflation much lower. "Nobody can tell me that going from 3% to 1% inflation brings a big economic bonanza," says Arthur J. Rolnick, research director at the Federal Reserve Bank of Minneapolis.

Indeed, Greenspan suspects the Fed is already close to realizing its ultimate goal of stable prices--given a statistical bias that may overstate inflation by as much as 1.5 percentage points. The Fed chief has often defined price stability as the point at which businesses and individuals stop factoring inflation into their behavior. Among recent anecdotal evidence bolstering that case: The length of new union contracts averaged a record 38.7 months--a sign that workers are less concerned about protecting their wages against future inflation.

Greenspan feels confident that the less restrictive monetary course he'll steer this year will please Clinton's other two Fed nominees: Office of Management & Budget Director Alice M. Rivlin, tapped for vice-chair, and St. Louis economic consultant Laurence H. Meyer, nominated as a governor. Greenspan should like his new teammates--he may have helped select them. Some Administration officials question whether Senate Republicans gave the Fed chief a veto over Clinton's picks. Although Greenspan denies involvement, some Clintonites suspect he opposed the President's first choice for vice-chair, financier Felix G. Rohatyn, a strong advocate of faster economic growth.

There's no question that Rivlin and Meyer are more in sync with Greenspan than Rohatyn. Both nominees agree that the economy can't grow much beyond 2.2% a year without rekindling higher prices. And neither is willing to drive up unemployment to achieve more gains against inflation. With the political winds of '96 howling, a moderate monetary policy is the safest bet--and just what Dr. Greenspan ordered.EDITED BY OWEN ULLMANN By Dean FoustReturn to top

DEMOCRATIC DOWNSIZING?

--Corporate America is taking a lot of heat from Pat Buchanan for worker layoffs, but guess who's also thinking of downsizing: the Democratic National Committee. Party sources say the DNC is mulling over a reduction in its political staff, which now numbers 38, although no one is willing to say how many might be let go. The reason for a cutback: White House political advisers want the DNC to concentrate its spending on TV and radio ads rather than on salaries to support grassroots activities, phone banks, and outreach to constituency groups. Of a record $43 million raised last year, the DNC spent $15 million on ads promoting President Clinton. Another barrage of commercials is scheduled to begin in April.EDITED BY OWEN ULLMANNReturn to top